WASHINGTON (AP) — A federal appeals court delivered a serious setback to President Barack Obama's health care law Tuesday, potentially derailing billions of dollars in subsidies for many low- and middle-income people who bought policies.

In a case before the U.S. Court of Appeals for the District of Columbia Circuit, a group of small business owners argued that the law authorizes subsidies only for people who buy insurance through markets established by the states — not by the federal government.

A divided court agreed, in a 2-1 decision that could mean premium increases for more than half the 8 million Americans who have purchased taxpayer-subsidized coverage under the law. The ruling affects consumers who bought coverage in the 36 states served by the federal insurance marketplace, or exchange.

The majority opinion concluded that the law, as written, "unambiguously" restricts subsides to consumers in exchanges established by a state. That would invalidate an Internal Revenue Service regulation that tried to sort out confusing wording in the law by concluding that Congress intended for consumers in all 50 states to have subsidized coverage.

The administration is expected to appeal the ruling.

The issue is crucial to the success of the health law because most states have been unable or unwilling to set up their own exchanges. The inaction stems in many instances from opposition by Republican governors to the Affordable Care Act.

The small business owners filing the lawsuit say the tax credits enacted by Congress were intended to encourage states to set up their own health benefit exchanges and that the penalty for not doing so was withdrawal of tax credits for lower-income residents.

Supporters of the act say the purpose of the tax credit was not to promote the establishment of state exchanges, but rather to achieve Congress's fundamental purpose of making insurance affordable for all Americans.

The case revolves around four words in the Affordable Care Act, which says the tax credits are available to people who enroll through an exchange "established by the state."

The challengers to the law say a literal reading of that language invalidates the IRS subsidy to people in the federal exchanges. The opponents say that people who would otherwise qualify for the tax credits should be denied that benefit if they buy insurance on a federally facilitated exchange.

"It is implausible to believe that Congress gave the IRS discretion to authorize $150 billion per year in federal spending, particularly when Congress had directly spoken to this issue," the challengers to the IRS subsidy said in a court filing. "Major economic decisions like these — indeed, any decisions granting tax credits — must be made unambiguously by Congress itself."

The Obama administration and congressional and state legislative supporters of the Affordable Care Act say the challengers are failing to consider the words of the statute in its entirety.

"Congress did not provide that the tax credits would only be available to citizens whose states set up their own exchanges," says an appeals court filing by congressional and state legislative supporters of the Affordable Care Act. Congressional lawmakers and state legislators supporting the act said that limiting the subsidies to state exchanges could destabilize important aspects of the law, such as the individual mandate requiring most people to buy insurance.

The judges on the case were Thomas Griffith, an appointee of President George W. Bush; A. Raymond Randolph, an appointee of Bush's father; and Harry Edwards, an appointee of President Jimmy Carter, who dissented.

A lower court had ruled that the law's text, structure, purpose, and legislative history make "clear that Congress intended to make premium tax credits available on both state-run and federally-facilitated Exchanges."

But the appeals court concluded the opposite — that the letter of the law "unambiguously restricts" the law's subsidies to policies sold through exchanges established by the state.

"We reach this conclusion, frankly, with reluctance," Judge Thomas Griffith said Tuesday. "At least until states that wish to can set up exchanges, our ruling will likely have significant consequences both for the millions of individuals receiving tax credits through federal exchanges and for health insurance markets more broadly."

In his dissent, Judge Harry Edwards called the ruling "a not-so-veiled attempt to gut the Patient Protection and Affordable Care Act" and warned that the panel's ruling "portends disastrous consequences."

One of the more positive sounding admonitions from health care reform opponents was that the United States had "the best health care in the world," so why would you mess with it? Well, it's true that if you want the experience the pinnacle of medical care, you come to the United States. And if you want the pinnacle of haute cuisine, you go to Per Se. If you want the pinnacle of commercial air travel, you get a first class seat on British Airways. Now, naturally, you wouldn't let just anyone mess with someone's tasting menu or state-of-the-art air-beds. But like anything that's "the best," the best health care in the world isn't for everybody. The costs are prohibitively high, the access is prohibitively exclusive, and the resources are prohibitively scarce.
What do the people in America who "fly coach" in the health care system get? Well, at the time of the health care reform debate, they were participating in a system that was, by all objective measurements, <a href="http://www.huffingtonpost.com/2010/06/24/us-health-care-expensive_n_624248.html">overpriced and underperforming</a> -- if you were lucky enough to be participating in it. As anyone who's fortunate enough to have employer based health care or unfortunate enough to have a pre-existing condition can tell you, health care for ordinary people already involved all of those things that we were told would be a feature of the Affordable Care Act -- long waits, limited choice, and rationing.
When the <a href="http://www.commonwealthfund.org/Content/Publications/Fund-Reports/2010/Jun/Mirror-Mirror-Update.aspx">Commonwealth Fund rated health care systems by nation</a>, the top marks in the surveyed categories went to the United Kingdom, New Zealand and the Netherlands. Ezra Klein examined the study, and <a href="http://voices.washingtonpost.com/ezra-klein/2010/06/us_health-care_system_still_ba.html">observed</a>:
"The issue isn't just that we don't have universal health care. Our delivery system underperforms, too. 'Even when access and equity measures are not considered, the U.S. ranks behind most of the other countries on most measures. With the inclusion of primary care physician survey data in the analysis, it is apparent that the U.S. is lagging in adoption of national policies that promote primary care, quality improvement, and information technology.'"